Bethesda vs. Interplay: partial court transcripts

Thanks to Interplay shareholder orionquest, we have acquired a partial transcript of the preliminary injunction hearing in the Bethesda v. Interplay case. For now, full transcripts are not publicly available, but we'll let you know when they are.

MR. MARBURY: So, the other condition is full scale development and it is also clear that they have not engaged in full scale Development of this MMO. The witness we believe will testify consistently with his deposition, that they have approximately 20 people working, or at least he thought there were 20 people working in Bulgaria on this project when he visited back in March of 2009. We will put on testimony that that is far, far less than what you need to make one of these in full scale development. Based on our own experience in the MMO field, you need more than a hundred people working on this to be in full scale development. And, in fact, to confirm that testimony we will share with the Court Interplay's own budget documents that show that their initial budget on this required them to use well north of 50 people, and that was a scaled down version.

So, I think it's pretty clear that there's been no full scale development at any time by this company, or by Masthead. This company has seven employees right now. They can't do it, and it appears that the Bulgarian company, who is already busy with another game, isn't doing it. So, with those two conditions not met, those rights automatically are exterminated, or terminated, and that's what the parties agreed to. So that's the trademark license agreement issue on the MMO.

THE COURT: But in terms of preliminary injunctive relief on that, if they're not doing it and they don't have the financing, what is it that you need in terms of preliminary injunctive relief?

THE COURT: They haven't put it up on the web though. I mean, this is where the two sort of blur. They took it down. They're not advertising to anybody that they're developing it. What is it you need them to stop immediately, as opposed to once you prevail?

MR. MARBURY: Well, Your Honor, they are developing it and they intend to develop and they intend to exploit it, and they would like to advertise it, and there's nothing in place right now to prevent them. There is no order from the Court to prevent them from advertising that they're doing a Fallout brand. And so you understand the marketplace, a lot of this industry is driven by the blogs. There are an enormous number of blogs out there where people post either wild speculation or a company's plan or their discussions about Fallout and other games. In fact, there are specific websites specifically for Fallout. So there is an enormous amount of discussion out there about how the company is develop a Fallout, how Interplay is developing a Fallout MMO. So, it is -- they're out there. The marketplace is aware of it. They're developing it and they tend to explicit. That's damaging to my client.

More to the point, Your Honor, when the parties entered into the trademark license agreed specifically, they negotiated and agreed that at the two year marker there would be some sort of determination made about whether they had the rights to go forward and continue to do this development or not. That two year time limit has expired. The parties also agreed that because of the unique and special character of the IP that we own, that we be, shall be entitled to injunctive and equitable relief. So the parties already negotiated for some sort resolution in year two, and we are obviously seven months past year two. But to the extent that they continue to do this, that impacts our brand and it impacts, you know, the marketplace. They've already expressed that they are continuing today to work on this project. And so what we're going to end up doing is fighting about this two years down the road, or three years down the road, if they actually do launch. So that's the immediacy of the issue for us, that we've negotiated for a to year cap and they failed to comply and it's time for us to be able to clear the air in the marketplace so they know, so the market place is clear that Interplay doesn't have the rights to the Fallout MMO.

Also, Your Honor, try to make another point, one of the keys to success in the software industry is clarity, clarity of rights, rights and title. These games, as I have described, take many years to develop. And to the extent that we are, we're not in the process of developing our own Fallout MMO right now. We're doing something else. But to the extent that the rights have been terminated, we would have an interest in developing it at some point and in order to do that we need clarity about what the rights are and what they're not. We're not developing it now because we don't have a ruling from a court that we have the rights to do it. But we need that clarity for our own business purposes as well. So what we're seeking is what we bargained for, which is at April, 2009, you have either, the company is either, you know, going at this in a appropriate matter, fully funded and going full scale with it with a lunch or not, because, Your Honor, again, if they launch, there's a royalty stream there for us, right. If they don't launch, we've got an asset that's not depreciating but it's not being used. So either they use it and we get a royalty stream, or we get it back and we find another way to use it. But to the extent that this drags on that royalty stream's not being exploited either by us directly or by Interplay --

THE COURT: How does a Preliminary Injunction help, because it's only preliminary? It could be different at the end. I mean, it doesn't help clarify the situation. A Preliminary Injunction is designed to sort of freeze the status quo so that we can have a breathing space to get something decided. That's not going to clarifying anything. And if they're not actually going to launch, they're doing it at their own risk to develop it, if they continue to do that, because ultimately a court may decide that they didn't have the right to do it because of their default by last April.

MR. MARBURY: Well, Your Honor --

THE COURT: A Preliminary Injunction does not get you any clarity.

MR. MARBURY: Well, Your Honor, I will tell you that in their SEC filings Interplay has disclosed that they're out there trying to raise money today, or at least in their last quarterly report, they're trying to raise money based on exploiting the brand and the IP that they have. So Interplay is out there using the Fallout mark, trying to raise money, and that impacts my client directly. They don't have the rights to do that, Judge. They're under funded. They're using a company out there that has no experience in lunch MMOs, that everybody knows hasn't ever done anything successfully. They've never launched a game in their career at Masthead. So that's impacting the Fallout brand, which we have invested an awful lot of money in, Your Honor.

It's a very value brand for us, and to the extent that there's dilution of that, that's not something that is easily quantified. As you know, trademark, you know, in good will, very challenging to quantify. So the longer that it goes, on the more dilution, or the more weakness, the more discussions online, the harder it is for our client. So that's why we think we're entitled to injunctive relief. We bargained for it. They agreed that we shall be entitled to equitable relief in the agreements. They haven't met the conditions. I think it's pretty clear, Judge. So, you know, our burden here is to make a clear showing, Judge, of a number of things. One, that we're likely to succeed on the merits, two that we're likely to suffer irreparable harm, and I think that's satisfied both by the facts of the case and the presumption at law for trademark infringement being irreparable harm. The balance of the equity --

THE COURT: Here's where their Motion on the Subject Matter Jurisdiction helps you, I hope, to focus also. You're talking about a presumption of harm on a trademark. On the trademark license agreement issue, that's a closer call on whether it's just a breach of contract or something else. So, you talk to me about presumption. I am not, I don't, I'm remaining silent because I don't want you to think that I accept the proposition that even if you show likelihood of success on the TLA issue in terms of breach of that agreement, that it necessarily implicates irreparable harm.

MR. MARBURY: Understood, Your Honor. Understood. We think the balance of the equities tip in our favor clearly, and that the public has a strong interest in not just protecting valid trademarks and other IP rights, and not just enforcing the agreements that we entered into at arms length, but also to prevent customer confusion in the marketplace. So that's what we intend to show here today, Your Honor, and we appreciate your time and attention.

THE COURT: Okay. Mr. Gersh, you can make a brief opening, I guess, and help set the scene for what I'm about to listen to.

MR. GERSH: Thank you, very much, Your Honor. Your Honor, I would like to address one point that you raised at the end which I think is very crucial to this entire issue, and that is briefly you raised the subject matter jurisdiction.

THE COURT: Um hum.

MR. GERSH: And the irreparable harm coming out of the contract and the presumption. I still believe, as we said in our papers, that overriding, the first thing that you have to decide is has there been a breach of contract, and I still think that it's a subject matter jurisdiction. I'd still ask the Court to consider it, even though you're not going to do it this morning, because I believe that the cart has been put before the horse here. Until you decide whether there's been a breach of contract, which is more a state law issue in the cases that we raised, you can't get to whether there has been trademark infringement. The Maryland case we cited I think is right on point. The Illinois case is even clearer. That's all I'd like to say.

THE COURT: I did read them over. The problem I have with your assertion is the counts four and five of the complaint. As I understand the law now, if on the face of a complaint it clearly invokes the federal statute and rights available under federal statute, that that's enough. Because if what you're asking me to do is in essence to go determine the merits of an underlying dispute, then the subject matter jurisdiction merges too much into the merits, and we're not going to decide it on a threshold basis. I have to look at the well pleaded complaint, and I have here counts four and five, never mind what one and two and three even would be, or even later. Well, the common law one is Delaware law, not even federal. But that's why I'm fairly satisfied at this point, from my look at it last night, that they have done what they needed to do to invoke the subject matter jurisdiction at this juncture. But, again, I will look at it more carefully. You have certainly educated me to look at that in a lot of ways, but you had to find, you had to go long and hard to find another case after Gibraltar that you think is even close, because I think when you fairly look at the face of a complaint, this one does have those two counts. Okay.

MR. GERSH: Just for clarification, and I do agree with Your Honor. In fact, I wish we had brought this to Your Honor's attention earlier. We just found it. I've been doing this for 30 years and don't consider this little nuance between the breach of contract, and we did come across the cases just yesterday, which is why we pointed out, and it is quite a nuance. And I think that when you look at Gibraltar, the only thing that Gibraltar talks about is that it does say they didn't plead trademark infringement.

THE COURT: It was an arbitration compelling.

MR. GERSH: Correct. They tried to bootstrap it basically, and under the Federal Arbitration Act. But in the Illinois case, they made it very, very clear that no matter what you call it, if it is a breach of contract, and that is your threshold issue, and these are contract claims, it is a breach of contract and that state courts are just as well available to deal with the contract part of the claim, and you cannot turn a breach of contract into a trademark infringement and invoke subject matter jurisdiction in a federal court.

THE COURT: Exactly. If all we were dealing here with was the trademark license agreement dispute, that is whether you have the right to continue to try to develop the MMO, this would be a much tougher question. But as he said today, when we have the Trilogy Three and the -- I'm sorry, the Fallout Three or the Fallout Trilogy, where even if you have the right to go ahead and do something, if what you're doing is naming it in a way that causing confusion, I'm talking, that's trademark, not breach of contract. Whether you submitted it or didn't submit it is really not tissue and that, I think, is where they get into federal subject matter jurisdiction without question, because that's not just breach of contract, that's something else.

MR. GERSH: And that's kind of where we diverge, and because you never get to the issue of trademark infringement unless you find there's been a breach of contract you don't get there at all, because if we didn't breach the contract, as they allege, then we did not, we cannot possibly have infringed because we had, our clients had the rights. So you never get there, and that is the distinction that I think is very crucial to the consideration. It's not that -- It's not that we have a competing trademark case where you have somebody that comes along and said "I like your mark. I'm going to use it," and they copy it and steal it. That isn't our case. This situation is different. Interplay had the rights to use this, and the only basis that they bring a trademark infringement case before Your Honor today is because they're contending we have breached the agreement and therefore we're infringing the trademark, and that's the problem. You have to determine the breach before you get to infringement. If you find, if the Court finds there is in breach, you never get there. We didn't steal the mark. We didn't come along and use it differently. We used Fallout because we had the right to use Fallout.

THE COURT: You had the right to you Fallout. The question is do you have the right to use Fallout Trilogy.

MR. GERSH: And, if I might, that would be an issue of whether or not we breached the contract by not submitting it.

THE COURT: Whether that's a pre-existing product.

MR. GERSH: That's correct.

THE COURT: Which I understand, but all of the judges and all of the writers indicate what we've got here is something that is not easy to compartmentalize.

MR. GERSH: I appreciate that. Thank you.

THE COURT: I read it. I looked at it. We're going forward. At some point, if I have more of a concern I will, obviously you will be among the first to know.

MR. GERSH: Thank you, Your Honor. Your Honor, I think what I'll address is a couple of things that Mr. Marbury raised.
Interplay had the rights to use the mark, as I have indicated. Interplay used the marks that it has been using in the past, in the same manner in which they had been using them. They had use Fallout Trilogy previously. Mr. Marbury has indicated that Mr. Caen testified at his deposition Fallout Trilogy had been used in France. They were given a complete list of all of the companies that were using our mark at the time of the closing. Interplay has done nothing but to continue to usethat which it had used previously, and they did not have to submit those for approval. And, in fact, over a two year period did not submit any of the marks for approval. The only issue, as Mr. Marbury seems to indicate now, is Fallout Trilogy. Not that we didn't have the right to use Fallout, Fallout Two or Fallout Tactics, but it's Trilogy. So here's what we have. We have Trilogy. Talks about a compilation of three games. It's clearly identified on the box, and it shows the product that's on there. You asked the question, doesn't their determination have to be reasonable, and I submit that it does. And it still has to be reasonable whether we've submitted it before or not, because Interplay had been using it before and in fact believed and reasonably believed that they had the right to continue to use the box art that has been used in the past. They have done nothing different.

In most trademark infringement cases, Your Honor, somebody comes along and they're trying to take the good will of another company. In this particular case Interplay had the right to use that which it had actually developed originally, sold and licensed back certain rights. It didn't come along to steal anything. Trilogy, as far as I'm concerned, I think the evidence would be clear, doesn't refer to a third version of a game like Fallout Three. You'll see from the documents we've submitted, the packaging is completely different. The packaging completely identifies the product within it, but most importantly, there is no confusion in the marketplace. Zero.

As far as the Fallout MMO is concerned,per the court transcripts, there are at least 8 people at Interplay working on it and at least 20 people at Masthead working on it until they get more people once Masthead is done on their MMO + Masthead was the one who initially contacted Interplay about providing workers for Interplay.